Kansas City Southern said on Sunday it had deemed an offer from Canadian Pacific Railway superior to one from Canadian National, in the last lap of a months-long battle to become the first railroad to connect North America.
Canadian Pacific first made a roughly $ 29 billion offer for Kansas City Southern in March, before being completed by a $ 33.7 billion offer from rival Canadian National in April. But the deal with Canadian National met a key regulatory challenge this month, sending Kansas City back to talks with Canadian Pacific. The talks turned out to be fruitful.
The gem of the deal is Mexico, as the railways look to capitalize on trade flows across North America in the wake of the US-Mexico-Canada deal signed last year.
It can take time to reach an agreement. It must be approved by shareholders of both companies, as well as Mexican authorities and the Surface Transportation Board, the US regulator that oversees rail transactions.
Kansas City Southern has informed Canadian National of its intention to end the deal, the two companies said on Sunday. Canadian National has five days to make a better offer. If Kansas City opts for Canadian Pacific Railway, Canadian National will receive $ 700 million in severance fees, under the terms of their agreement.
Canadian National “continues to assess all the options available to us,” said Jonathan Doorley, spokesperson for Canadian National. The company “will make thoughtful decisions in the best interests of all CN shareholders and stakeholders and in accordance with our strategic priorities,” he said.
The deal with Canadian Pacific is the softened offer that Canadian Pacific made in August, valuing Kansas City at around $ 31 billion. It would offer Kansas City Southern common shareholders 2,884 Canadian Pacific common shares and $ 90 cash for each Kansas City share they own. Canadian Pacific would assume $ 3.8 billion in Kansas City’s outstanding debt.
“We are delighted to reach this important milestone and to continue this once in a lifetime partnership,” said Keith Creel, CEO of Canadian Pacific.
Last month, the Surface Transportation Board spoke out against the use of a voting trust by Canadian National and Kansas City. A voting trust is a common but controversial structure in such transactions. The decision was the first real test of the guidelines put in place in 2001 to increase competition in agreements involving the largest railways.
Canadian Pacific, which proposed a voting trust that regulators have not blocked, has successfully advocated for its deal with Kansas City Southern to be assessed outside of those guidelines, given its smaller size.
“As we have said throughout this process, CP remains committed to whatever this opportunity presents,” said Mr. Creel. “This proposed merger provides KCS shareholders with greater regulatory and value certainty. We are excited to move forward as we work to make this perfect match a reality. “